Doomsday scenarios are proliferating as the Dow and global debt levels increase to what seem to be unsustainable levels.

Of course, it is important to keep in mind that much of the growth in debt
levels is paralleled by a decline in the outstanding amount of equity – buyout groups like
Blackstone and KKR create debt in partnership with banks to buy up the
outstanding shares of a publicly traded company. This is sometimes referred to as
de-equitization.

The process is compounded by the attempt of existing publicly traded companies
to match the returns of PE firms by leveraging up their own companies through
borrowing to repurchase their own stock. This has now gone so far as to see in some
companies an effort to create debt instruments tied to the returns of particular assets
within the company rather than the company as a whole.

Debt trades in a slightly more disciplined manner than stock, generally
speaking, and, of course, for the debtor company it comes with many more strings attached. It is
fair to say that it is a form of ratcheting up the pressure to increase profitability.

At Delphi, for example, the Board of Directors borrowed 5 billion dollars and
then declared bankruptcy thus wiping out the common stock and putting complete control of the
company into the hands of bankers, the buyout czar Steve Miller (a close
associate of vulture capitalist Wilbur Ross) and the board of directors.

I believe this leverage up/equity down aspect of the cycles of fictitious
capital needs to be better understood before one could confidently claim we are in a bubble about to
burst.